Terrance Heath

Flat Tax: Back in the USSR

Filed By Terrance Heath | November 17, 2011 2:00 PM | comments

Filed in: Politics
Tags: capitalism, GOP presidential candidates, Republican base, socialist policies, USSR, workers' rights

After labeling Barack Obama a “socialist,” you wouldn’t think conservatives would be taking their cues from socialists, right? You’d be wrong. From the “flat tax” to the ideal capitalist system, Republican presidential candidates seem to be getting their ideas and inspiration from current and former socialist regimes.

China Syndrome

It gets confusing after a while. In their recent “Commander-in-Chief” debate, GOP candidates couldn’t make up their minds about China.

On the one hand, Rick Perry warned that China, with an economy that’s thriving largely because it’s got the manufacturing sector we used to have, risks ending up “on the ash heap of history.”

On the other hand, Michelle Bachmann extolled China success as an example of the kind of capitalism we should be practicing. (Again, if we had the manufacturing sector that China has -- you know, the one we used to have…)

Or maybe Bachman just meant we should go back to the kind of capitalism we used to practice -- low wages, no worker rights or protections, no environmental protections, child labor, etc.

Back in the USSR

What’s more interesting is the that socialist connection to the “flat tax” idea that almost the whole Republican field enthusiastically supports. Herman Cain’s “999″ plan was so popular with the Republican base (but not with the conservative elite) that (the demonic subtext notwithstanding) it wasn’t long before Rick Perry rushed to roll out his own flat tax plan. Even Newt Gingrich, the “idea man” of the American right, buried a 15 percent “flat tax” plan three points deep in his economic agenda.

ProPublica’s Braden Goyette pointed out most of the countries that have adopted flat taxes in recent years are from the former Soviet bloc.

Most of the countries that have adopted flat taxes in recent years are from the former Soviet bloc. Throughout the 1990s and early 2000s, six former Soviet republics and three other Eastern European countries flattened their income-tax rates. Some, like Russia, adopted a flat personal income tax but kept a different rate for corporate income. Others, like Estonia and Slovakia, instituted a flat tax on personal and corporate income. Many of these countries also have a value-added tax, which taxes the difference between the final cost of a product and the cost of the materials used to make it.

At first glance, it looks like the flat tax was a success in these countries. Russia’s personal income tax revenue increased 26 percent. Both Russia and Estonia experienced GDP growth -- 11.7 percent for Estonia, and 6 to 8 percent for Russia. But Goyette points out that there are a number of reasons why these results don’t translate into success in the U.S.

It’s no coincidence that, as Goyette writes, the flat tax took “came at a time of massive economic change” for the former Soviet Bloc contrives. Anyone whose read Naomi Klein’s The Shock Doctrine: The Rise of Disaster Capitalism understands that it was a classic case of applying Chicago-style shocks before the former Soviet Bloc citizens knew what hit them.

Other factors account for what looks like “success.” Goyette writes that flat tax policies led to increased revenues largely because they had the effect of improving collection in countries that had massive “shadow economies” -- like the underground economies that have grown in the U.S. and Europe, as the recession drags on. In Russia, an “increase in real wages” (which runs counter to U.S. conservative positions on wages), helped drive increased revenues in Russia.

While there’s a strong case to be made that Americans are being subjected to economic “shocks” similar to those administered to former Soviet bloc countries, Goyette tells us what we already know, but bears repeating: a “flat tax” is flat wrong for America.

Experts say we probably wouldn't see any immediate spike in personal income-tax revenue if the U.S. were to adopt a flat income tax. Instead, they say, the candidates' plans probably would lead to plummeting revenue for the first several years.

"Any growth effects, even in the best of circumstances, that's a five-year proposition," Hufbauer said. "And how much growth is a matter of debate."

Analyses from the nonpartisan Tax Policy Center project that Cain and Perry's plans would both lead to decreased revenue; the center hasn't yet scrutinized Gingrich's plan. Of the other two, Perry's plan would have a greater impact on government coffers, cutting projected revenue by about 27 percent by 2015.

The Tax Policy Center also concluded that Perry and Cain’s plans would mean an increased tax burden on middle- and low-income families. Cain has since modified his plan so those below the poverty line would be exempt from the individual tax. A Tax Policy Center researcher told The Washington Post that poor families would still see a tax increase under the plan, albeit a smaller one.

It’s hard to see how a flat tax would do anything but further shrink the economy and halt what little anemic “growth” we seen. It’s even harder to imagine a “serious” candidate or political party suggesting such a ruinous policy.

Unless, flatlining the economy is actually the desired outcome.

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